neil parkinson
TRANSCRIPT
PD-16
Developments on International Accounting Standards from a P&C and Life Perspective
Canadian Institute of Actuaries Annual Meeting
June 28, 2007
Neil Parkinson National Director, Insurance Industry Practice
Neil Parkinson National Director, Insurance Industry Practice
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1.1. What is IFRS? How and when do we get there?What is IFRS? How and when do we get there?
2.2. Current Insurance IFRS StandardsCurrent Insurance IFRS Standards
3.3. IFRS for Insurance Contracts (May 2007 Discussion IFRS for Insurance Contracts (May 2007 Discussion Paper)Paper)
4.4. Getting Ready for AdoptionGetting Ready for Adoption
Agenda
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What is IFRS?
Single set of globally accepted high-quality Single set of globally accepted high-quality accounting standardsaccounting standards
Currently in use by over 90 countries around Currently in use by over 90 countries around the worldthe world
Issued by the International Accounting Issued by the International Accounting Standards Board Standards Board
Based in London, UKBased in London, UK
14 members – one Canadian representative – 14 members – one Canadian representative – Patricia O’MalleyPatricia O’Malley
IFRS are principles-based standards
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IFRS – Moving Towards a Global Standard
Fixed deadlines for IFRS implementation
Convergence plans
US-GAAP - Convergence intended
No intent to converge with IFRS
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Why International Financial Reporting Standards?
IFRS is becoming the basis of GAAP in most major IFRS is becoming the basis of GAAP in most major jurisdictions outside Canada and the U.S.jurisdictions outside Canada and the U.S.
IFRS are principles-based standards, as opposed to IFRS are principles-based standards, as opposed to rules-based standards (eg. US GAAP)rules-based standards (eg. US GAAP)
In 2005, the Canadian Accounting Standards Board In 2005, the Canadian Accounting Standards Board announced a directional change, from converging with announced a directional change, from converging with US GAAP, to converging with IFRSUS GAAP, to converging with IFRS
IFRS concepts are beginning to permeate Canadian IFRS concepts are beginning to permeate Canadian GAAP as new standards are issuedGAAP as new standards are issued
Many Canadian companies, including insurers, already Many Canadian companies, including insurers, already report upstream on this basisreport upstream on this basis
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International convergence – direction of Canadian GAAP
IFRS
Cdn. GAAP
U.S. GAAP
2006 2011
Direction – US GAAP to converge with IFRS – but how and how fast?
2005
How big a “bang”?
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International convergence – US FASB
Memorandum of UnderstandingMemorandum of Understanding
FASB and IASB pledged to use FASB and IASB pledged to use their best efforts to:their best efforts to:
make existing financial reporting make existing financial reporting standards fully compatible as soon standards fully compatible as soon as is practicable; andas is practicable; and
coordinate future work programs to coordinate future work programs to ensure that compatibility is ensure that compatibility is maintainedmaintained..
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International Convergence Project – US SEC
Statement by SEC Staff: A Securities Regulator Looks Statement by SEC Staff: A Securities Regulator Looks at Convergenceat Convergence
Single set of globally accepted accounting Single set of globally accepted accounting standardsstandards
Propose to eliminate the requirement to reconcile to Propose to eliminate the requirement to reconcile to US GAAPUS GAAP
May accelerate adoption of IFRS for US domestic May accelerate adoption of IFRS for US domestic SEC registrants if SEC eliminates the IFRS-US SEC registrants if SEC eliminates the IFRS-US reconciliation requirementreconciliation requirement
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The Canadian AcSB’s Implementation Plan
THE UNKNOWNS….
• Confirmed transition date
• Outcome of the SEC’s review of the application of IFRS
IFRS go-liveSpring 2006
2009 2010 20112008
Calendar year periods
AcSB’s progress review
Qualitative disclosures of
differences (‘08 annual report)
Quantify effects of changeover to IFRS (‘09 annual
report)
Prepare comparative figures under
IFRS
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The New Financial Reporting Landscape in Canada
Not-for-profitGAAP
U.S. GAAP
Private CompanyGAAP = TBD
Public Company GAAP = IFRS
The shift to IFRS will affect all publicly accountable enterprises in Canada (This means you!)
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Current Insurance IFRS Standards
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Insurance accounting under current IFRS
IFRS 4 (in force)IFRS 4 (in force) Defines insurance contractsDefines insurance contracts
IFRS 7 (in force)IFRS 7 (in force) Disclosures required for insurance contracts Disclosures required for insurance contracts and related risksand related risks
Insurance project Insurance project Phase II (future)Phase II (future)
Agreement on how to measure insurance Agreement on how to measure insurance contracts was not reached in time for the contracts was not reached in time for the comprehensive introduction of IFRS in 2005. comprehensive introduction of IFRS in 2005. Existing “national GAAP” approaches continue Existing “national GAAP” approaches continue until Phase II standards on measurement are until Phase II standards on measurement are agreed (Discussion Paper issued May 4, 2007)agreed (Discussion Paper issued May 4, 2007)
• IFRS – account for insurance contracts, whatever the type of enterprise that issues them
(Current Canadian GAAP – defines accounting frameworks for insurance enterprises, separately for life and P&C)
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Current insurance IFRS – IFRS 4
IFRS 4 defines insurance contracts: IFRS 4 defines insurance contracts:
““contract under which one party (the insurer) accepts significant contract under which one party (the insurer) accepts significant
insurance risk from another party (the policyholder) by agreeing to insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the compensate the policyholder if a specified uncertain future event (the insured event) adversely affect the policyholder”insured event) adversely affect the policyholder”
Difference from current Canadian GAAP Difference from current Canadian GAAP
Life insurer savings products (e.g. deferred annuities, Life insurer savings products (e.g. deferred annuities, term certain annuities) would normally be considered term certain annuities) would normally be considered deposit contracts rather than insurancedeposit contracts rather than insurance
Implementation in Europe – lots of effort in distinguishing Implementation in Europe – lots of effort in distinguishing between insurance contracts and deposit contractsbetween insurance contracts and deposit contracts
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Current insurance IFRS – IFRS 4, cont’d
IFRS 4:IFRS 4:
Defines reinsurance contracts too, but does Defines reinsurance contracts too, but does notnot require require quantitative testing of risk transfer as in US FAS 113 quantitative testing of risk transfer as in US FAS 113 (as a result, IFRS allows a wider range of reinsurance (as a result, IFRS allows a wider range of reinsurance contracts to be given reinsurance accounting than is contracts to be given reinsurance accounting than is the case under US GAAP, or OSFI Guideline D-9)the case under US GAAP, or OSFI Guideline D-9)
Deposit components may need to be unbundled from Deposit components may need to be unbundled from an insurance contractan insurance contract
Did not address how to measure insurance contract Did not address how to measure insurance contract liabilities, but requires a “liability adequacy test”liabilities, but requires a “liability adequacy test”
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Current insurance IFRS – IFRS 4 and 7
Requires a wide range of disclosures on insurance Requires a wide range of disclosures on insurance contracts:contracts:
Risk selection and risk concentrationsRisk selection and risk concentrations
Sensitivity analysis Sensitivity analysis
Requirements similar in principle to Canadian GAAP, Requirements similar in principle to Canadian GAAP, but appear to require more detailed disclosures but appear to require more detailed disclosures
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IFRS for Insurance Contracts(May 2007 Discussion Paper)
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Insurance Contracts Project Phase II Timetable
Phase II restartedPhase II restarted Mid 2004Mid 2004
First meeting of IWGFirst meeting of IWG Sep 2004Sep 2004
IASB Board meetings –IASB Board meetings – Feb 2006 -Feb 2006 -
Discussion PaperDiscussion Paper May 2007May 2007
Exposure DraftExposure Draft + 18 months+ 18 months
Final StandardFinal Standard + 12 months+ 12 months
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Features of IASB’s proposed measurement model
Single measurement modelSingle measurement model::
Life insurance and non-life insuranceLife insurance and non-life insurance
Prospective valuation:Prospective valuation:
Value of insurance contract = PV (all future cash flows)Value of insurance contract = PV (all future cash flows)
Current exit valueCurrent exit value::
The amount the insurer would expect to pay to another entity if The amount the insurer would expect to pay to another entity if it transferred all its remaining contractual rights and it transferred all its remaining contractual rights and
obligations immediatelyobligations immediately
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Preliminary views of the IASB discussion paper
IssueIssue IASB preliminary viewIASB preliminary view
Measurement attributeMeasurement attribute Current exit value - single approach for all insurance typesCurrent exit value - single approach for all insurance types
Discount rateDiscount rate Observable market rates for similar cash flowsObservable market rates for similar cash flows
Unit of accountUnit of account Risk margins determined on portfolio basisRisk margins determined on portfolio basis
Initial measurementInitial measurement Day one profits may be recognisedDay one profits may be recognised
Subsequent measurementSubsequent measurement All changes in estimates recognised immediatelyAll changes in estimates recognised immediately
Policyholder behaviourPolicyholder behaviour Recognise future premiums only if certain tests are metRecognise future premiums only if certain tests are met
Acquisition costsAcquisition costs Acquisition costs are expensed as incurredAcquisition costs are expensed as incurred
UnbundlingUnbundling Unbundle deposit and service components unless interdependentUnbundle deposit and service components unless interdependent
Participating contractsParticipating contracts Par component is a liability if a legal or constructive obligation existsPar component is a liability if a legal or constructive obligation exists
Own credit riskOwn credit risk Included in the liability measurementIncluded in the liability measurement
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Features of IASB’s proposed measurement model
An insurer should use the following inputs to measure An insurer should use the following inputs to measure its insurance liabilitiesits insurance liabilities
Current Current unbiasedunbiased probability-weighted estimates of probability-weighted estimates of future cash flows (ie an expected value approach)future cash flows (ie an expected value approach)Current market Current market discountdiscount rates that adjust the estimated rates that adjust the estimated future cash flows for the time value of money future cash flows for the time value of money An An explicitexplicit unbiased estimate of the margin that market unbiased estimate of the margin that market participants require forparticipants require for
Bearing risk (a risk margin); andBearing risk (a risk margin); andProviding other services (a service margin) Providing other services (a service margin)
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Calibration of risk margins – IASB model
A small majority of IASB members believe that a net gain A small majority of IASB members believe that a net gain may be recognised on inception if there is a difference may be recognised on inception if there is a difference between the price charged to policyholders and the price between the price charged to policyholders and the price that would be paid to another insurer to accept the riskthat would be paid to another insurer to accept the riskA small minority of IASB members believe that the margin A small minority of IASB members believe that the margin should be “calibrated” to the observed price for the should be “calibrated” to the observed price for the transaction with a policyholder, with no net gain on inception.transaction with a policyholder, with no net gain on inception.The IASB do not intend to attempt to define how margins The IASB do not intend to attempt to define how margins should be determined but will suggest criteria an insurer should be determined but will suggest criteria an insurer should consider in selecting an approach to risk marginsshould consider in selecting an approach to risk margins
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Future premiums and policyholder behaviour
CCash flows used in measuring insurance liabilities should ash flows used in measuring insurance liabilities should include future premiums (and the additional benefits that include future premiums (and the additional benefits that result from those premiums) only if one of the following result from those premiums) only if one of the following conditions are satisfied: conditions are satisfied:
The present value of future premiums is less than the present value The present value of future premiums is less than the present value of the resulting additional benefit paymentsof the resulting additional benefit payments
The insurer has an unconditional contractual right to enforce payment The insurer has an unconditional contractual right to enforce payment of premiumsof premiums
The policyholder must pay the premiums to retain a right to The policyholder must pay the premiums to retain a right to guaranteed insurability (a right that permits continued coverage guaranteed insurability (a right that permits continued coverage without reconfirmation of the policyholders’ risk profile at a price that without reconfirmation of the policyholders’ risk profile at a price that is contractually constrained)is contractually constrained)
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Acquisition costs
Acquisition costs should be expensed when incurred Acquisition costs should be expensed when incurred
To the extent that the premium paid includes an amount for To the extent that the premium paid includes an amount for the reimbursement of acquisition costs incurred, that the reimbursement of acquisition costs incurred, that amount should be recognised as premium on the inception amount should be recognised as premium on the inception of a contractof a contract
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Discretionary policyholder participation rights
Liability or equity?Liability or equity?Policyholder participation rights create a liability only Policyholder participation rights create a liability only when the insurer has a legal or constructive obligation when the insurer has a legal or constructive obligation to pay dividends to policyholdersto pay dividends to policyholdersIn assessing whether an insurer has a constructive In assessing whether an insurer has a constructive obligation the Board will rely on definitions in its current obligation the Board will rely on definitions in its current literatureliterature
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Comparison of IFRS proposals to Canadian GAAP
IFRS Phase IIIFRS Phase II Canadian GAAP Canadian GAAP
Liabilities discounted Liabilities discounted using market ratesusing market rates
Most Canadian insurers apply time Most Canadian insurers apply time value of money, but using their own value of money, but using their own expected portfolio returnsexpected portfolio returns
Use of market discount rates could lead Use of market discount rates could lead to greater accounting mis-matches in to greater accounting mis-matches in reported income, particularly for lifecos reported income, particularly for lifecos
Liability valuation to Liability valuation to include explicit risk include explicit risk and service marginsand service margins
Not done now, at least not directlyNot done now, at least not directly
Possible some may default to Possible some may default to “calibration”, to avoid day one profits“calibration”, to avoid day one profits
Changes in estimates Changes in estimates reflected in liability reflected in liability valuation immediatelyvaluation immediately
Consistent with Cdn GAAP (a possible Consistent with Cdn GAAP (a possible change for lifecos reporting upstream in change for lifecos reporting upstream in US GAAP, with its “locked in” US GAAP, with its “locked in” assumptions)assumptions)
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Comparison of IFRS proposals to Canadian GAAP, cont’d
IFRS Phase IIIFRS Phase II Canadian GAAP Canadian GAAP
Unearned premiums Unearned premiums (UPR) to be replaced (UPR) to be replaced with the “current exit with the “current exit value” measurevalue” measure
Not a conceptual change for lifecosNot a conceptual change for lifecos
Implementing this aligns the P&C model Implementing this aligns the P&C model more with the life approach; UPR replaced more with the life approach; UPR replaced with a liability for estimated cash future with a liability for estimated cash future flowsflows
Acquisition costs Acquisition costs expensed as incurred expensed as incurred (no deferral, or (no deferral, or “DAC”)“DAC”)
Not a conceptual change for lifecosNot a conceptual change for lifecos
Canadian P&C insurers defer and Canadian P&C insurers defer and amortize over policy term; the “current amortize over policy term; the “current exit value” liability should resemble (but exit value” liability should resemble (but not necessarily equal) the net amount of not necessarily equal) the net amount of UPR less DAC UPR less DAC
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Comparison of IFRS proposals to Canadian GAAP, cont’d
IFRS Phase IIIFRS Phase II Canadian GAAP Canadian GAAP
Reinsurance to be Reinsurance to be portrayed on a gross portrayed on a gross basisbasis
Not a change for P&C insurersNot a change for P&C insurers
A change for life insurers however A change for life insurers however
Classification of Classification of insurance vs. deposit insurance vs. deposit contractscontracts
Not a P&C issue, but life insurer Not a P&C issue, but life insurer revenues would exclude a lot of annuity revenues would exclude a lot of annuity deposits currently shown as premiumsdeposits currently shown as premiums
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IFRS Phase II – many questions remain…
The Phase II Discussion Paper expresses the The Phase II Discussion Paper expresses the preliminary conclusions of the IASB, but poses preliminary conclusions of the IASB, but poses numerous detailed questions, on both a conceptual numerous detailed questions, on both a conceptual level and “how to”level and “how to”
Other open questions on scope, eg.:Other open questions on scope, eg.:
Will credit insurance be treated as insurance, or as a Will credit insurance be treated as insurance, or as a financial guarantee?financial guarantee?
Workers compensation schemes covered?Workers compensation schemes covered?
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Getting ready for adoption
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Lessons Learned in Europe
European companies found that transition meant:European companies found that transition meant:Training finance and accounting staff worldwideTraining finance and accounting staff worldwideUpgrading their IT systems and adjustments to Upgrading their IT systems and adjustments to management reporting systemsmanagement reporting systemsDevelopment of policy and procedures manualsDevelopment of policy and procedures manualsRenegotiating contracts (bank and compensation Renegotiating contracts (bank and compensation agreements)agreements)Managing market expectationsManaging market expectations
Overall, European companies generally:Overall, European companies generally:Waited too long to get startedWaited too long to get startedSuffered from poor project managementSuffered from poor project management
The result → Relied heavily on external expertise to The result → Relied heavily on external expertise to get the job doneget the job done
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How will it be different in Canada?
A Phased Transition to IFRS
Earlier Communications to the Marketplace
Certifications of Internal Controls PRIOR to Adoption of IFRS
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THE TIME TO GET STARTED IS NOW!
IFRS go-liveFall 2006
2009 2010 20112008
Anticipating change and
Assess phase
Design phase Implementation phase
Pilot phase (comparatives under IFRS)
Calendar year periods
AcSB’s progress review
SEC registrants may choose toadopt IFRS in advance of 2011
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Anticipate the Change
Fall 2006
2009 2010 20112008
Anticipating change and
assess phase
• GAP analysis
• Systems and training needs assessments
• Assess other impacts of transition
• Impact of transition to internal control certifications
• Plan conversion path
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Design the Plan
Fall 2006
2009 2010 20112008
• Mobilize project team and the business
• Develop training plan
• Develop communications plan
• Identify, quantify and secure required resources
Design phase
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Implement the Plan
Fall 2006
2009 2010 20112008
• Execute training plans and system changes
• Convert budgeted results
• Renegotiate agreements and modify internal structure
• Quantify reporting differences
• Build or update tools (manuals, policies, reporting packages, F/S)
Implementation phase
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Test the Conversion
Fall 2006
2009 2010 20112008
• Test the conversion and dry run
• Generate required comparative figures
• Prioritize issues from conversion and rectify
• Manage business on an IFRS basis
• Draft required reconciliations to Canadian GAAP financial statements
Pilot phase (comparatives under IFRS)
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Wrap Up
Single biggest change ever to financial reportingSingle biggest change ever to financial reporting
Don’t underestimate the scale of the undertakingDon’t underestimate the scale of the undertaking
Affects educators, preparers, auditors and investment Affects educators, preparers, auditors and investment communitycommunity
Represents another huge and positive step forward in Represents another huge and positive step forward in global financial reportingglobal financial reporting
Possibility of more consistent regulatory approaches Possibility of more consistent regulatory approaches across jurisdictions across jurisdictions
Greater transparency, more comparability and potential Greater transparency, more comparability and potential for better investment decisionsfor better investment decisions
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““While it is now well known that the AcSB has opted to While it is now well known that the AcSB has opted to adopt IFRS, the AcSB is recommending that, in the adopt IFRS, the AcSB is recommending that, in the short-term, boards of directors of public companies short-term, boards of directors of public companies ensure that a member of management, or advisor, is ensure that a member of management, or advisor, is responsible for reporting on a regular basis on the responsible for reporting on a regular basis on the implications of IFRS conversion for their particular implications of IFRS conversion for their particular enterprise.” enterprise.”
((Julie Dickson, Deputy Superintendent, OSFI, CIAA Julie Dickson, Deputy Superintendent, OSFI, CIAA Conference, September 25, 2006)Conference, September 25, 2006)
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Neil Parkinson
KPMG LLP
(416) 777-3906
www.kpmg.ca
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. All rights reserved. Printed in Canada on recycled paper.